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Court prohibits reference to arbitration after contract has been fully discharged - International Law Office

Litigation - India

Court prohibits reference to arbitration after contract has been fully discharged

In Union of India v Hari Singh(1)the Supreme Court considered whether the parties could invoke an arbitration clause when the principal agreement had been fully and finally discharged. After an in-depth discussion, the court held that once the parties to a contract have confirmed in writing that the contract has been fully and finally discharged and no claim or dispute is outstanding, thereafter the matter cannot be referred to arbitration.

Facts and issues

Hari Singh was awarded a contract by the Northern Railways through a contract agreement dated May 1 2002 for the construction of all minor bridges, including a retaining wall, side drains and other protection and allied works, in connection with a rail link. The contract agreement, as the principal agreement, also provided for the execution of a supplementary agreement. The contract was executed by the respondent and the entire amount due to Singh was paid through a supplementary agreement dated April 27 2004.

Through this supplementary agreement it was agreed between the parties that the entire amount already paid to Singh would be in full and final satisfaction of all his dues and claims under the principal agreement. It was further agreed and understood between the parties that in consideration of the payment already made under the supplementary agreement, the principal agreement would stand finally discharged and rescinded, along with all the terms and conditions, including the arbitration clause. This implied that even the arbitration clause contained in the principal agreement ceased to have any effect and was deemed to be non-existent for all purposes.

However, immediately after receiving the entire amount, Singh issued a legal notice to the Northern Railways and thereafter filed for arbitration before the High Court of Punjab and Haryana. Without appreciating the aforementioned facts, the court, by an impugned judgment, referred Singh's claim to an arbitral tribunal consisting of two arbitrators.

Aggrieved by the court's decision, Union of India filed a special leave petition before the Supreme Court.Decision

The Supreme Court observed that the high court had overlooked the settled principle of 'accord and satisfaction', which implies that where both parties to a contract confirm in writing that the contract has been fully and finally discharged by the performance of all obligations and no claims or disputes are outstanding, the courts will not refer any subsequent claim or dispute to arbitration.

On consideration of case law, the court also observed that as Singh had accepted the amount in full and final discharge, the matter was no longer an entirely new or untouched matter,and Singh would not be justified in invoking arbitration because there was no arbitral dispute for reference to arbitration.

Comment

The Supreme Court has clarified and approved a principle that is backed by logic (ie, the principle of accord and satisfaction). Clearly, when a contract has been discharged to the 'accord and satisfaction' of the parties, the arbitration agreement will also necessarily lose enforceability.

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